CEZ: Absent yield support, a multiples rerating (stays HOLD)

Following CEZ’s FY17 earnings, we raise our 2018E net profit forecast by c.16% to CZK 12.5bn on a lower depreciation charge, and retain our HOLD rating, with an updated price target (PT) of CZK 525/share. By extending its estimates of the useful life of the traditional generation fleet, management has delivered a material boost to CEZ’s bottom line; nonetheless, we believe that dividends from the 2018-19E earnings are still likely to fall by half vs. our forecast of CZK 35/share to be paid this year (yields of c.3.4% vs. c.7%), despite the higher power price deck. In lieu of the traditionally strong yield support, management has presented plans to split the company, via a carve out and IPO of the “clean” business, followed by a buyout of minorities from Traditional generation. It is a persuasive proposal – both eliminating the new nuclear risk and triggering a multiples rerating, about half of which is already in the price, we believe – but, at this point, we are not completely confident that it has full political support. Thus, our PT reflects a 40% probability of the Transformation scenario, i.e., of a buyout for minority investors at the mid-point of our target range (9-12x EV/EBITDA), where the upside could be on the scale of c.6-30%; the downside, if rejected, is c.10%, on our estimates).